200907437L
STAR SUPERSEDED INFORMATION
Accession No. – 200907437L
Supersede type - Complete
Document superseded on – 08/01/2014
Issue(s) that caused the document to be superseded – audit procedures
Reason(s): Replaced by AP 133 (STAR 201408939L).
STAR SUPERSEDED INFORMATION
Accession No.(s) - 200907437L
Supersede type - Partial
Document superseded on - 9-2-10
Issue(s) that caused the document to be superseded -Energy drinks
Reason(s) - Policy clarification - Energy drinks are generally
considered a taxable soft drink under rule 3.293 relating to food
and food products. But those drinks that are labeled or required to
be labeled with "dietary supplement" or "supplement" are exempt under
Rule 3.284 relating to drugs and medicines. See STAR 201006848L for
current policy.
AP 122
Date: July 22, 2009
To: All Audit Personnel
From: Emma Fuentes
Subject: Guidelines for Convenience Store Audits
The following guidelines must be used for all convenience stores audits
completed on or after the issue date of this memo. This does not replace
AP 92, it only updates our procedures to fully utilize data available to us:
* HB 11 data, available taxpayer records, and third party records must be
used to produce the most accurate audit results.
* The product mix of each convenience store must be considered. Industry
averages should only be used in the absence of these records.
* For periods prior to HB 11 data where no records are available, average
taxable sales amounts must be used to estimate the periods with missing
records.
* Rebates for tobacco products and allowances for purchases made with the
Lone Star Card must be addressed.
Records:
* HB11 data must be the starting point for convenience store audits,
whether used as internal control verification or as data used to estimate
the audit.
* The auditor must request records from the taxpayer and/or their
representative.
* Vendors must be contacted to obtain records for the entire audit period,
if available.
* All of these records must be compared to each other for accuracy and
consistency in purchasing patterns. If material differences are noted
between HB 11 data and purchase records received from vendors, contact
the Computer Audit Information & Support (CAIS) section in Audit Headquarters.
Use of Data
The availability of HB 11 data enables us to efficiently detail two major
taxable product categories (beer/wine and tobacco products) from January
2008 forward. It allows us to use more than one taxable product category
to estimate/sample an audit. A sample should only be considered when a
convenience store has good internal controls, complete records and
inventory purchases are voluminous.
Individual Store's Product Mix & Shelf Test
Auditor judgment is crucial to determining the product mix of each individual
convenience store. The product mix of each convenience store must be
analyzed. This mix should be taken into consideration when reviewing
available records. A shelf test must be conducted on each active outlet. It
should have a minimum of 10 different high/medium volume items for each
category. These 10 items can be a mix of the different variety of sizes
and brands available for sale (for example, 12 pack, 6 pack, 18 pack, 20 oz,
one liter bottles, quart bottles, smokeless tobacco, cigar products, domestic
beer, imported beer, Coors, Budweiser, etc.) as these are often sold with
different markups. If the taxpayer does not offer a variety of sizes and
brands, this must be documented to explain why 10 items were not used.
Beer Barn / Discount Tobacco Outlets, etc.
In instances where only beer, wine and tobacco are considered to be the
primary taxable products, the best audit method to use is the mark-up method.
An example is a beer barn or a convenience store that attributes the majority
of its taxable sales to these items. On these audits, purchase information
from HB 11 data, the taxpayer, and/or vendors (such as beer distributors
and/or cigarette distributors) should be used as mentioned above. A mark-up
is established by performing a shelf test. The resulting mark-up is applied
to the purchase information and compared to reported taxable sales.
Differences would be additional taxable sales. There is no need to gross-up
additional immaterial taxable items.
Convenience Store with Significant Taxable Items Other than Beer and Tobacco
There may be instances where the taxpayer sells a significant amount of
other taxable items. These items should be included in the shelf test. As an
example, the auditor observes that the following items are being sold at the
store:
1. Ice
2. Motor oil
3. Detergent
4. Phone cards
5. Soft drinks
6. Energy drinks
7. Toilet paper
8. Charcoal
9. Magazines
If a majority of these items can be traced to purchase invoices, there is
reasonable assurance that the records are substantially complete and should
be used to perform a purchase mark-up test. There is no need to estimate
for any of the unaccounted invoices.
If the auditor has sufficient records for a short time period (a few months
worth of records), then it may be possible to compute the product mix for
the store. These percentages should be used to "gross-up" the additional
average taxable sales to arrive at audited taxable sales.
Example: HB 11 data x corresponding mark-up = $360,000
Compute the percentage of each product to total sales:
1. Product mix for beer/wine at estimated sales = $35,600.04 (1) / (5) =
50.84 percent *
2. Product mix for cigarettes/tobacco estimated sales = 18,655.33 (2) / (5)
= 26.64 percent *
3. Product mix for soft drinks at estimated sales = 6,812.30 (3) / (5) =
9.73 percent
4. Other taxable product mix at estimated sales = 8,952.94 (4) / (5) =
12.79 percent
Total - $70,020.61 - 100 percent
Audited taxable sales: $360,000 / 77.48 percent * = $464,636.04
The above example is based on audits where a shelf test is conducted. If
no shelf test is conducted, use the cost of the items sold to calculate the
product mix percentage.
Industry Averages
If the auditor cannot get sufficient records to compute a store's individual
product mix, the attached product mix percentages may be used when estimating
additional taxable sales. These percentages were developed utilizing data
from the Texas Petroleum Marketers and Convenience Store Association (TPCA),
Robert Morris & Associates Annual Financial Statements (RMA), and National
Association of Convenience Stores (NACS). These mark-up percentages and
product mix percentages should be used only when necessitated by lack of
reliable records or if the store is closed. The industry averages should not
be used when the product mix is available because the product mix of the
store may not be consistent with the national product mix percentages.
Periods prior to HB 11 (January 1, 2008):
If there are no records prior to January 2008, estimated taxable sales should
be based on the average taxable sales for the periods when records were
available. We should no longer be using the error factor to estimate
additional taxable sales for the prior periods. This new method is a
result of taxpayers who may have increased reported taxable sales after
the passage of HB 11 after being contacted as a result of our desk
compliance project.
Example:
Total Audited Taxable Sales using 12 months of HB11 data and other reliable
data: $360,000
Average Monthly Audited Taxable Sales for periods without records: $360,000/
12 months = $30,000
The $30,000 would be used for each reporting period without records. The
reported taxable sales amounts should be subtracted from the Average Monthly
Audited Taxable Sales.
Tobacco Products Rebates and Lone Star Card Allowances:
A taxpayer may receive a rebate from the cigarette manufacturer(s) which
reduces the purchase price of tobacco products. The auditor should request
the rebate information from the taxpayer. If provided, these amounts must be
deducted from the purchase price of the tobacco products by month. Also, the
rebate amounts should be considered when calculating the mark-up, when
applicable. If the taxpayer or their representative is unable or unwilling
to provide rebate information, the computed mark-up for tobacco will be small
or possibly a negative number. If this occurs, the attached industry averages
should be used.
Allowances for Lone Star Card should be made only when adjustments are made
for products that can be purchased using the Lone Star Card (soft drinks,
chips, candy). If adjustments are only for tobacco products and beer, no
Lone Star Card allowance should be given. Refer to the Grocery Store Manual,
Chapter V for additional information.
Notification of Estimation
Auditors must issue the appropriate Notification of Estimation.
If you have any questions about this, please contact Les Arche 512-463-1749,
Gilbert Garcia, 512-257-4636, or Emma Fuentes at 512-305-9893.
Product Category: Beer/Wine
Average Convenience Store Mark-Up Percentages 2006: 127.67 percent
Average Convenience Store Mark-Up Percentages 2007: 124.07 percent
Average Convenience Store Mark-Up Percentages 2008: Note 1
Average Product Mix of Taxable Sales for Stores that Sell Beer 2006: 14 percent
Average Product Mix of Taxable Sales for Stores that Sell Beer 2007: 14 percent
Average Product Mix of Taxable Sales for Stores that Sell Beer 2008: Note 1
Average Product Mix of Taxable Sales for Stores that Do Not Sell Beer 2006: Note 2
Average Product Mix of Taxable Sales for Stores that Do Not Sell Beer 2007: Note 2
Average Product Mix of Taxable Sales for Stores that Do Not Sell Beer 2008: Note 2
Product Category: Candy
Average Convenience Store Mark-Up Percentages 2006: 184.09 percent
Average Convenience Store Mark-Up Percentages 2007: 186.22 percent
Average Convenience Store Mark-Up Percentages 2008: Note 1
Average Product Mix of Taxable Sales for Stores that Sell Beer 2006: 4 percent
Average Product Mix of Taxable Sales for Stores that Sell Beer 2007: 3 percent
Average Product Mix of Taxable Sales for Stores that Sell Beer 2008: Note 1
Average Product Mix of Taxable Sales for Stores that Do Not Sell Beer 2006: Note 2
Average Product Mix of Taxable Sales for Stores that Do Not Sell Beer 2007: Note 2
Average Product Mix of Taxable Sales for Stores that Do Not Sell Beer 2008: Note 2
Product Category: Cigarettes/Tobacco
Average Convenience Store Mark-Up Percentages 2006: 118.44 percent
Average Convenience Store Mark-Up Percentages 2007: 118.02 percent
Average Convenience Store Mark-Up Percentages 2008: Note 1
Average Product Mix of Taxable Sales for Stores that Sell Beer 2006: 41 percent
Average Product Mix of Taxable Sales for Stores that Sell Beer 2007: 40 percent
Average Product Mix of Taxable Sales for Stores that Sell Beer 2008: Note 1
Average Product Mix of Taxable Sales for Stores that Do Not Sell Beer 2006: Note 2
Average Product Mix of Taxable Sales for Stores that Do Not Sell Beer 2007: Note 2
Average Product Mix of Taxable Sales for Stores that Do Not Sell Beer 2008: Note 2
Product Category: Chips/Snacks*
Average Convenience Store Mark-Up Percentages 2006: 152.09 percent
Average Convenience Store Mark-Up Percentages 2007: 150.17 percent
Average Convenience Store Mark-Up Percentages 2008: Note 1
Average Product Mix of Taxable Sales for Stores that Sell Beer 2006: 7 percent
Average Product Mix of Taxable Sales for Stores that Sell Beer 2007: 7 percent
Average Product Mix of Taxable Sales for Stores that Sell Beer 2008: Note 1
Average Product Mix of Taxable Sales for Stores that Do Not Sell Beer 2006: Note 2
Average Product Mix of Taxable Sales for Stores that Do Not Sell Beer 2007: Note 2
Average Product Mix of Taxable Sales for Stores that Do Not Sell Beer 2008: Note 2
Product Category: Other Taxable Food/Drinks
Average Convenience Store Mark-Up Percentages 2006: 199.88 percent
Average Convenience Store Mark-Up Percentages 2007: 197.16 percent
Average Convenience Store Mark-Up Percentages 2008: Note 1
Average Product Mix of Taxable Sales for Stores that Sell Beer 2006: 15 percent
Average Product Mix of Taxable Sales for Stores that Sell Beer 2007: 15 percent
Average Product Mix of Taxable Sales for Stores that Sell Beer 2008: Note 1
Average Product Mix of Taxable Sales for Stores that Do Not Sell Beer 2006: Note 2
Average Product Mix of Taxable Sales for Stores that Do Not Sell Beer 2007: Note 2
Average Product Mix of Taxable Sales for Stores that Do Not Sell Beer 2008: Note 2
Product Category: General Merch/HBC **
Average Convenience Store Mark-Up Percentages 2006: 156.96 percent
Average Convenience Store Mark-Up Percentages 2007: 156.57 percent
Average Convenience Store Mark-Up Percentages 2008: Note 1
Average Product Mix of Taxable Sales for Stores that Sell Beer 2006: 5 percent
Average Product Mix of Taxable Sales for Stores that Sell Beer 2007: 6 percent
Average Product Mix of Taxable Sales for Stores that Sell Beer 2008: Note 1
Average Product Mix of Taxable Sales for Stores that Do Not Sell Beer 2006: Note 2
Average Product Mix of Taxable Sales for Stores that Do Not Sell Beer 2007: Note 2
Average Product Mix of Taxable Sales for Stores that Do Not Sell Beer 2008: Note 2
Product Category: Soft Drinks
Average Convenience Store Mark-Up Percentages 2006: 159.21 percent
Average Convenience Store Mark-Up Percentages 2007: 159.26 percent
Average Convenience Store Mark-Up Percentages 2008: Note 1
Average Product Mix of Taxable Sales for Stores that Sell Beer 2006: 14 percent
Average Product Mix of Taxable Sales for Stores that Sell Beer 2007: 15 percent
Average Product Mix of Taxable Sales for Stores that Sell Beer 2008: Note 1
Average Product Mix of Taxable Sales for Stores that Do Not Sell Beer 2006: Note 2
Average Product Mix of Taxable Sales for Stores that Do Not Sell Beer 2007: Note 2
Average Product Mix of Taxable Sales for Stores that Do Not Sell Beer 2008: Note 2
* Taxable when eating area is available
** This category includes ice, beauty care, automotive products and general
taxable merchandise.
Comments:
These are industry averages and should be used when records are unavailable
or unreliable. For years after 2005, use the appropriate percentage for that year.
A separate projection will be required for each period in the audit. An average
of these percentages is not allowed.
Note 1: Use 2007 percentages when using this table until 2008 numbers are
available.
Note 2: Use AP 92 percentages when using this table until current numbers are
available.
Note 3: To determine the allowable food stamp percentage, total gross sales will
be needed. Gross Sales = Estimated taxable sales / .8941
As STAR is the Comptroller's research system for Texas tax policy issues,
only tax-specific audit policy memos (AP Memo) are included here. AP memos
not on STAR can be found on Window on State Government on the
Audit Memos web page.
ACCESSION NUMBER: 200907437L
SUPERSEDED: S
DOCUMENT TYPE: L
DATE: 07/22/2009
TAX TYPE: SALES